Comparison between Growth of Money and Nominal GDP of Canada - Assignment Example

Macro & Micro economics Question This is a research paper, which is based on micro and macroeconomics. The paper takes a wider scope of economic aspect, addressing three parts. The paper is narrowed down to the study of the trend of economy of one nation, Canada. This essay seeks to test various economic theories by use of the current economic situations and trend. In the paper, a comparison between growth of money and nominal GDP of Canada over the past ten years is given. The comparison is analyzed in relation to the quantity theory of money. In part two, evolution of unemployment and inflation in Canada in the last 15 years is discussed in details. Unemployment and inflation are brought on board, utilizing data from the IMF World Economic Outlook. The effect of income distribution in the economy of Canada is also discussed at the third part of the paper. The data of income distribution in Canada is used to calculategini coefficient. The gini coefficient is further used to supplement other economic calculations such as P ratios and top income shares. Introduction The economic status of Canada, just like any other economy of a normal nation, has been rising and falling in the aspects of GDP and growth of money over the last 10 years. The unsteady economic progress has affected the evolution of unemployment and inflation in Canada. The economy of Canada has being rising gradually over the last ten years. This has been characterized by a constant rise in the nation’s GPD. The rise in Gross Domestic product in Canada has been brought by various advancements in the economic and production sector. The rise in Gross Domestic product has affected the growth of moneythrough the quantity theory of money. The quantity theory of moneystates that the circulation and supply of money within the economy has a direct and proportional impact on the price of the goods and services.In the case of growth of GDP in Canada, there has been an equal increase in the growth of money, leading to rise in the prices of goods and services. The production level of Canada has increased over the last decade, following the adoption of new methods of production and advancement of technology. This has generally created employment opportunities to many, increasing the purchasing power hence rise in the prices of goods. Bar Graph showing the increasing GPD of Canada between 2004 and 2013 in Trillion Dollars Note: This general increase in GDP is relatively proportional to the growth of money, over the ten years in Canada. The money supply and circulation velocity are relatively proportional to the quantity of goods and services supplied andtheir prices. The case of increase in the GDP in Canada is just similar to the economic situation in United States. The two situations caught the nations in a state of industrialization and technological advancement. The subsequent increase in goods and service production over the years is because of industrialization. This aspect as seen its impact across all the sectors of the economy, increasing employment levels, money circulation, purchasing power and the rise in prices of the products. Question 2 The Phillips curve as applied in macroeconomics explains the relationship that exists between the rate of unemployment and inflation. This curve as advanced by A. W. Phillips shows that the relationship between the two variables is usually stable and inverse in nature. This implies that when the rate of unemployment is low within a particular economy, the wages paid for labor increase gradually leading and may result to inflation. The theory advanced shows that when a state experiences economic growth, inflation proceeds and this results to more jobs and thus less unemployment rate. This curve was advanced to suit the short run since in the long run, the policies to curb inflation has no impact on the rate of unemployment. The inverse relationship has been disapproved by various scholars noting that the Phillips curve does not always correlate and that both inflation and the rate of unemployment have a direct relationship. In the case where the rate of unemployment and that of inflation have a direct relationship, the long run Phillips curve is a vertical line. The activities in the global arena have flourished greatly over the years. The economic growth in Canada has improved based on the report by International Monetary Fund with more impetus for growth being likely due to emerging markets and improved housing. Over the years, Canada has experienced increased financial volatility and high costs of capital which have led to slow economic growth and increased rate of unemployment. This low growth led to stagnation in the development of key economic sectors necessitating the need for structural adjustment programs and changes in monetary policies. The country has experienced a widespread decrease in real interest rates over the last fifteen years and fluctuations in the market trends arising from financial crisis across the world. This means that the current Growth Domestic Product is small. When analyzing the growth trend and the national income in Canada, we can draw that the state has experience slow growth and economic development due to stagnancy in key economic sectors and low employment rate. The Phillips curve can be used to understand this key phenomenon in the state by focusing on the evolution of inflation and unemployment for the last fifteen years. In illustrating the applicability of the curve, that the rate of unemployment is inversely related to inflation, we can draw that in the inflation is reduced from two to zero, then the rate of unemployment increases by 1.5 percent. This means that workers have high tolerance for cuts in their real wages than nominal ones. For instance, a worker will appreciate an increase in wage by 2% when inflation is at 3% than a reduction in wages by 1% when the inflation is zero (Agresti, 1996). The Phillips curve as applied in Canada shows a stable an inverse relationship between unemployment rate and inflation. However, with the drop in oil prices and the growth in the housing market, economic growth is likely to go up due to liquid and safe mortgage finance system, which is a boost to the previous declining national income. Changes in oil prices influence trade through low costs of capitals and improved profitability. This means the supply of money and income is high translated to more employment and thus low unemployment rate. This will lead to high inflation within the state. The country may not however experience the monetary peaks due to slow growth and instability of market trends in oil prices in the global market. This relationship can be shown in the equation below and through regression by ordinary least squares model (Hutcheson & Moutinho 2008). Ordinary least squares regression of unemployment and inflation The Phillips curve illustrated mathematically gives an equation of the form, where W is the total cost of wage per an employee as well as the taxes and benefits accrued in employment. In this case, the focus is mainly on production wages of an employee because it is such production costs that are used in pricing decisions by firms. The equation indicates that the growth in monetary wages increases with the trend rate of growth in these monetary wages as indicated by the superscript T and reduces with the rate of unemployment. The function (f) increases monotonically with U such that the reduction in wages as a result of high unemployment rate is shown by the negative sign in the equation. Using a computer generated equation relating economic growth in Canada, the rate of unemployment and inflation, we can use regression to compare the deviance in these two variables. The equation of the form Y = α - β1X1 has α as a parameter indicating predicted wage when there is zero growth. β1 is a parameter indicating that a unit increase in wages, inflation decreases by X1 units. Taking this equation, we obtain a relationship of wages and inflation of the form: Y= 0.207- 0.003 X1 The significance of this relationship between rate of unemployment and inflation can be estimated by comparing the deviance of the two variables using a table such as one below, which omits and includes inflation consecutively. The deviance is then assessed for significance using the R statistic. Model Deviance df Change in variance R-statistic P-value Growth=a 0.1255 29 0.0755 42.28 Read More